Supervisor of Assessments v. Greater Baltimore Medical Center, Inc.

WOODWARD, J. The Supervisor of Assessments of Baltimore County (“the Supervisor”), appellant, challenges the Maryland Tax Court’s (“Tax Court”) determination that Greater Baltimore Medical Center, Inc. (“GBMC”), appellee, a non-profit hospital, was the owner of an office building and parking garage (“the Improvements”) built on GBMC’s land, thereby qualifying GBMC for a charitable property tax exemption. GBMC owned a tract of land that it leased to Baltimore Hospital Investors LLC (“BHI LLC”), a for-profit Delaware limited liability company, which was established to aid in financing the construction of the Improvements. BHI LLC then leased the same tract of land back to GBMC, with an agreement that GBMC, as agent for BHI LLC, would build the Improvements on the land and the lease would thereafter include the Improvements. After construction of the Improvements, an agent for GBMC and BHI LLC filed an application for a charitable tax exemption for the land and the Improvements with the Supervisor.

The Property Tax Assessment Appeals Board (“Tax Appeals Board”) ultimately denied the charitable tax exemption application. GBMC appealed the denial to the Tax Court, which reversed the Tax Appeals Board’s decision, and granted the charitable tax exemption, because GBMC was the “sole and exclusive owner of the [IJmprovements for Maryland real property tax purposes and for purposes of satisfying the ownership requirement under the charitable exemption statute.” The Supervisor filed a petition for judicial review of the Tax Court’s ruling in the Circuit Court for Baltimore County. The circuit court affirmed the Tax Court’s ruling. On appeal, the Supervisor presents two questions for review by this Court, which we have consolidated into one question: 1 ²⁸⁶ 1.

Did the Tax Court err in determining that GBMC, as a nonprofit hospital, was the owner of an office building and parking garage for real property tax purposes and thus satisfied the ownership requirement under the charitable exemption statute? 2 For the reasons set forth herein, we shall affirm the judgment of the circuit court, thereby upholding the decision of the Tax Court. BACKGROUND As set forth by the Tax Court, the facts are as follows: GBMC owns a 4.5[-aere] parcel adjacent to GBMC Hospital in Towson, Maryland. GBMC’s main campus, the medical center campus, includes over a million square feet of office space, with parking garages, located on several adjoining tax parcels of land. During 2004, GBMC began construction of a new medical office building, together with an adjacent parking garage, within the medical center campus.

The building was constructed and is now occupied for ²⁸⁷ medical office use by for-profit and non-profit providers. The garage is used for parking cars of visitors to that building and other nearby facilities. The financing for the construction of the improvements, together with related infrastructure improvements, was arranged through a structured lease and leaseback financing arrangement, which may be referred to as “structured leased financing.” The evidence indicates that the financing structure was necessary in order to avoid additional debt on the financial balance sheet of GBMC. GBMC ground leased the vacant land to BHI LLC, as tenant, pursuant to a Lease Agreement ([“]Ground Lease[”]) dated August 6th, 2004.

BHI LLC was a special purpose entity established to facilitate the financing of the improvements on the land. The initial term of the Ground Lease was for approximately fifty-one years with an additional ten year option. The Ground Lease provides that, upon expiration of the term of the Ground Lease, the land and improvements revert back to GBMC. BHI LLC owns and has title to the improvements during the Ground Lease term, subject to the reversion to GBMC upon the expiration of the initial term and the additional term if the lease is extended.

BHI LLC leased the improved property after construction back to GBMC for twenty-six years with seven five year options under an Improvement Lease (“[ ] Improvements Lease”) dated April 6 th,2004. Under Section 34(a) of the Improvements Lease, BHI LLC retains title to the improvements during the leaseback term. In the event GBMC defaults on its obligations, BHI LLC has the right to re-enter and take possession of the land and improvements constructed thereon and re-lease the property. BHI LLC obtained the funds to construct the improvements through Legg Mason Mortgage Capital Corporation [ ], which loan was evidenced by a Note and a Leasehold Deed of Trust to [Legg Mason Mortgage Capital Corporation].

The leaseback to GBMC required GBMC to use the funds of the loan to cause the improvements to be construct ²⁸⁸ ed as agent of the investor in accordance with the terms of the Improvements Lease. Petitioner contends that the lease and leaseback form of financing structure insure that the record title to the land and the improvements remained with GBMC throughout the term of the Ground Lease. GBMC is assured of the ultimate reversion of land and all of the improvements at the end of the term of the Ground Lease. Financing allows GBMC to make payments to the Investor pursuant to the Improvements Lease assuring the Investor of having adequate funds to repay the lender under the Note while providing an investment return to BHI LLC.

The Ground Lease and Improvements Lease effectively make GBMC responsible and liable for all obligations incident to the ownership and operation of the land and improvements. The financing allows GBMC to avoid having to report the financing transaction as debt on its financial statements, while allowing the Investor rights to the use and occupancy of the land and improvements for the remaining term of the Ground Lease. Consequently, GBMC is obligated for the periodic payment of rent, as opposed to a payment of debt service on an outstanding debt on its financial statements. On March 15, 2006, Curtis Campbell, agent for BHI LLC and GBMC, applied for a charitable property exemption on behalf of “B[HI LLC] leased to GBMC” with the Supervisor.

After filing the charitable exemption application, Campbell met with assessors from the Maryland State Department of Assessments and Taxation (“SDAT”), who then denied the application. Campbell appealed the denial to the Tax Appeals Board, and, on March 10, 2008, the Tax Appeals Board denied the application for charitable exemption, because “[a]ppellant is not legal owner of the property as required by law.” The record is unclear, however, to whom the Tax Appeals Board was referring when it stated that “[a]ppellant is not legal owner.” On March 21, 2008, GBMC filed an appeal to the Tax Court from the charitable exemption denial. After a hearing, the Tax Court, on December 29, 2008, vacated the denial of the ²⁸⁹ charitable exemption and remanded the case to the Tax Appeals Board and then to the Supervisor. The Tax Court held that “[f|or the purposes of Maryland real property tax exemption law, GBMC [wa]s clearly the record owner of both the land and the improvement[s], and, therefore, [wa]s entitled to the charitable exemption.” On January 23, 2009, the Supervisor filed a petition for judicial review of the Tax Court’s December 29, 2008 ruling in the Circuit Court for Baltimore County.

In an order entered on October 15, 2009, the circuit court affirmed the Tax Court’s ruling, finding a “sufficient reasonable basis for the Tax Court’s Decision.” The Supervisor filed a timely notice of appeal to this Court. Additional facts will be set forth below as necessary to resolve the question presented. DISCUSSION The Parties’ Contentions The Supervisor argues that the Tax Court erred as a matter of law when it found that GBMC, and not BHI LLC, owned the Improvements situated on the land owned by GBMC. According to the Supervisor, the “holder of legal title to property is the owner for property tax assessment purposes,” and thus only the holder of legal title to a property may qualify for an exemption for that property.

The Supervisor concedes that he “generally relies on the land records to establish ownership, i.e., legal title, for real property on the assessment roll.” The Supervisor, however, points to the recorded Reciprocal Parking Easement Agreement and Leasehold Deed of Trust, the unrecorded Ground Lease, 3 Improvements Lease, and Construction Escrow and Security Agreement to show that BHI LLC was the owner of the Improvements for the 2006-2007 tax year. The Supervisor argues that the Tax Court ignored these documents, “de ²⁹⁰ priv[ing] the documents of the[ir] legal significance,” and, in effect, “disregarded the manifest evidence that the [I]mprovements were owned by BHI LLC.” The Supervisor concludes that, because BHI LLC is the owner of the Improvements, only BHI LLC can apply for a tax exemption on the Improvements, and as a for-profit company, BHI LLC does not qualify for the charitable tax exemption. 4 In the alternative, the Supervisor contends that ownership for real property tax purposes is not limited to “ownership of title to the land,” but also includes “certain lesser interests in real property, such as the interest of a mortgagor or grantor under a deed of trust” under Maryland Code (1985, 2007 Repl.Vol.), § 6-102(d)(3) of the Tax-Property Article (“T.P.”). The Supervisor contends that, because BHI LLC is the grant- or under a leasehold deed of trust, BHI LLC “qualifies as the owner of the [I]mprovements” for property tax purposes. GBMC responds that “[t]he established rule in Maryland is that the record owner is the owner of real property for tax purposes and the assessor is neither required nor permitted to go beyond the land records in determining the person to whom property is assessable.” GBMC argues that, because GBMC was the uncontested record owner of the land when it contracted for the Improvements, then GBMC remains the owner of the Improvements “unless it has otherwise conveyed away its ownership interest.” GBMC contends that “[m]ere conveyances of leasehold interests in realty do not divest ownership” and that “the Supervisor has effectively acknowledged that there are no recorded documents that convey ²⁹¹ ownership of the Improvements away from GBMC.” GBMC concludes that it has record title to the Improvements and thus is the owner of the Improvements for real property tax purposes.

GBMC also argues that the Supervisor mistakenly asks this Court to rely on unrecorded leases and on recorded documents to which GBMC was not a party. According to GBMC, “references in unrecorded leases have no bearing on the ownership determination for Maryland real property tax purposes because they do not alter record title.” GBMC agrees with the Tax Court that “the terms of the lease agreements merely served to establish the contractual relationships between GBMC, BHI LLC, and the Lender.” GBMC claims further that, even if BHI LLC is the owner of the Improvements for federal income tax or financial accounting purposes because of the contractual documents, “[o]wnership for Maryland real property tax purposes is simply determined under an ownership test that is different from that used for these other purposes.” GBMC claims that T.P. § 6—102(d)(3) actually supports its position that GBMC remains the “owner” of the Improvements for real property tax purposes, because that section provides for the taxation of an interest of a mortgagor or a grantor under a deed of trust. As GBMC explains, its role, and not BHI LLC’s role, in the “lease and leaseback financing structure is analogous to that of a mortgagor or grantor under a deed of trust.” Thus, according to GBMC, a mortgagor or grantor under a deed of trust, like GBMC, “continues to be treated as the owner of the realty despite having granted a security interest in the realty in favor of the lender.” Standard of Review As an administrative agency, the Tax Court’s decisions are reviewed under the “same appellate standards generally applied to agency decisions.” Comptroller of the Treasury v. Johns Hopkins Univ., 186 Md.App. 169, 181 , 973 A.2d 256 (2009). As this Court set forth in Comptroller of the Treasury v. Johns Hopkins Univ.: ²⁹² We review the decision of the Tax Court, not the ruling of the circuit court on judicial review.

The Tax Court’s factual findings are reviewed for substantial evidence in the record. Under the substantial evidence test, a factual finding must be upheld if it is such that a reasoning mind reasonably could have found it from the agency record (here, the evidence before the Tax Court). Even if the Tax Court does not state the reasons for its decision, reversal is not required if the record discloses substantial evidence supporting the decision. Likewise, we review the Tax Court’s mixed findings of fact and law for substantial evidence in the agency record.

Determinations involving mixed questions of fact and law must be affirmed if, after deferring to the Tax Court’s expertise and to the presumption that the decision is correct, a reasoning mind could have reached the Tax Court’s conclusion. We are not so constrained in our review of the Tax Court’s decisions of law. Ordinarily, that review is de novo. Yet, even with regard to some legal issues, a degree of deference should often be accorded the position of the administrative agency.

Thus, an administrative agency’s interpretation and application of the statute which the agency administers should ordinarily be given considerable weight by reviewing courts. Id. at 181-82 , 973 A.2d 256 (citations and quotations omitted). Record Ownership All real property located in Maryland is taxable to the owner of the real property by the SDAT. T.P. § 6-101(a)(1).

It is clear that, under Maryland law, the record owner, as listed in the land records, is the owner of real property for tax assessments purposes. Mayor & City Council of Baltimore v. Boitnott, 356 Md. 605, 617, 619 , 741 A.2d 1079 (1999); Johns Hopkins Univ. v. Bd. of County Comm’rs of Montgomery County, 185 Md. 614, 617 , 45 A.2d 747 (1946). Under T.P. § l-101(dd)(l), real property is defined as “any land or improvements to land.” See also Black’s Law Dictionary 1218 (6th ed. 1990) (defining “real property” as “[l]and, ²⁹³ and generally whatever is erected or growing upon or affixed to land.”). Improvements are “such things as are placed thereon by the way of betterments which are of a permanent nature and which add to the value of the property as real property ... includ[ing] buildings and structures of every kind.” Allentown Plaza Assocs. v. Suburban Propane Gas Corp., 43 Md.App. 337, 346 , 405 A.2d 326 (1979) (quotations omitted).

Consequently, improvements affixed to the land are “considered part of the real property,” and “ownership of the improvements follows title to the land.” 41 Am.Jur.2d Improvements § 3 (2005). See also Allentown Plaza Assocs., 43 Md.App. at 345 n. 9, 405 A.2d 326 (“Things of a personal nature or buildings or other structures upon the land, which have been so fixed to land as to become a part thereof ... pass with the land ....”) (quotations omitted). Thus, subject to express statutory exceptions that are not applicable in the instant case, 5 the owner of real property according to the land records also owns the improvements built thereon. It follows then that, for someone other than the record landowner to own the improvements on the land, there must be a recorded deed or other instrument of record showing a transfer of the title to the improvements to another owner.

See Md.Code (1974, 2010 Repl. Vol), § 3-101 of the Real Property Article (“R.P.”). 6 ²⁹⁴ In the case sub judice, at the trial before the Tax Court, GBMC introduced evidence indicating that GBMC was the owner of the land and the Improvements according to the land records. When questioning GBMC’s Executive Vice President and Chief Financial Officer, Eric L. Melchior, GBMC’s counsel introduced into evidence a “printout” from the SDAT website, which lists “Greater Baltimore Medical Center, Inc.” as the owner of “4.497 AC PT LT 1 MOB,” i.e., the land and the Improvements, and shows no “transfer” of the land or the Improvements under the “Transfer Information” section. During the introduction of the SDAT document into evidence, the following exchange took place: [GBMC’ S COUNSEL]: Q. And I’d like to show you next a printout from the SDAT[’s] website, which is the basic website one goes to for this—for real property tax purposes to see who owns what.

One aside, Your Honor, if we could here? I’d like to talk to [the Supervisor’s counsel] on the record here about this document. [Supervisor’s counsel], this speaks of the account number we’re dealing with being a particular account number 240013547. I thought we should confirm for the Court, or stipulate that we agree that is the property we’re dealing with . . . . [SUPERVISOR’S COUNSEL]: This appears to be the correct account number for that property, yes. [GBMC’ S COUNSEL]: Again 240013547 should be the right account number for what we’re dealing with. Q. I’m going to show you this.

This is, again, merely a printout ²⁹⁵ from the [SDAT], the State department that handles real property tax matters. And if I could ask you what it shows for this parcel, which was agreed is the parcel we’re talking about, who the State has noted as the owner of the parcel? GBMC Medical—or Greater Baltimore Medical Center, Inc. [WITNESS]: And is that consistent with your expectations as to who would show up in the Land Records in the State of Maryland ... [GBMC’S COUNSEL]: Yes. [WITNESS]: ... as owning the land and improvements involved here? [GBMC’S COUNSEL]: Yes. [WITNESS]: I’d like to move that for admission ... [GBMC’ S COUNSEL]: Do we have any objection to the [SDAT] document you’re referring to being introduced into evidence? [TAX COURT]: [SUPERVISOR’S COUNSEL]: No. GBMC thus introduced the SDAT document into evidence before the Tax Court to demonstrate that, according to the land records, GBMC is the record title owner of the land and the Improvements. The Supervisor did not object to the introduction of such a document as evidence of record title ownership of the land and Improvements.

The Supervisor, however, argues that BHI LLC is the owner of the Improvements and that its ownership of the Improvements was “established” by the Ground Lease, Memorandum of Lease, Improvements Lease, Construction Escrow and Security Agreement, Reciprocal Parking Easement, and ²⁹⁶ Leasehold Deed of Trust, all of which were dated April 6, 2004. The Memorandum of Lease, Reciprocal Parking Easement, and Leasehold Deed of Trust, however, were the only-documents recorded in the land records. We will address each of the documents relied on by the Supervisor in chronological order. GBMC, the landlord, entered into an unrecorded Ground Lease with BHI LLC, the tenant.

In the Ground Lease, GBMC leased to BHI LLC “all of [GBMC]’s right, title and interest in the Leased Property,” with “Leased Property” defined as “collectively, the Land, the Improvements, the Building Systems and the Appurtenant Rights.” Paragraph 10(a) of the Ground Lease provides: Landlord and Tenant acknowledge and agree that: (a) as of the date of this Lease no material improvements exist on the Land (excluding, however, the Meeting House), and (b) pursuant to the Construction Escrow Agreement, Tenant shall cause Landlord (as its agent) to cause the MOB and Parking Garage and related Improvements to be constructed in accordance with the terms and conditions of the Construction Escrow Agreement (the “Initial Improvements”) (Emphasis in original). Pursuant to the Ground Lease’s “Recording” section, 7 a Memorandum of Lease was recorded in the Baltimore County land records. Except for the metes and bounds description of the Leased Property and the signatures of the parties, the Memorandum of Lease states, in its entirety: 31. Recording.

Landlord and Tenant will execute, acknowledge, deliver and cause to be recorded or filed or, at Landlord’s expense, registered and re-recorded, refiled or re-registered in the manner and place required by any present or future law, a memorandum of this Lease, and all other instruments, including, without limitation, releases and instruments of similar character, which shall be reasonably requested by Landlord or Tenant as being necessary or appropriate to protect their respective interests in the Leased Property. ²⁹⁷ THIS MEMORANDUM OF LEASE (this “Memorandum”) made as of the 6 day of April, 2004, is between GREATER BALTIMORE MEDICAL CENTER, INC. (“Landlord”), with an address of 6701 North Charles Street, Baltimore, Maryland, 21204, Attention: Chief Financial Officer; and BALTIMORE HOSPITAL INVESTORS LLC, a Delaware limited liability company (“Tenant”), with an address of c/o Net Lease Capital Advisors, Inc., One Tara Boulevard, Suite 403, Nashua, New Hampshire 03062, Attention: Douglas F. Blough, Chief Financial Officer. 1. Description of Lease. By Lease Agreement made as of the same date as this Memorandum between Landlord and Tenant (the “Lease”),[ 8 ] Landlord has leased to Tenant certain real property located in Baltimore County, Maryland, as more particularly described below.

The parties hereto desire to enter into this Memorandum to give record notice of the existence of the Lease. 2. Description of Leased Property. Subject to the terms and conditions of the Lease, the Leased Property consists of the Land described on Schedule A attached to this Memorandum of Lease, together with the Appurtenant Rights (as defined in the Lease). Subject to the terms of the Lease, Landlord has also granted to Tenant certain Easements (as defined in the Lease)